Expanding Homeownership

It’s no secret that low to moderate income individuals enjoy significantly lower rates of homeownership than the rest of the country. It’s also common knowledge that minorities, specifically, black and Hispanic households, are less likely to own homes than other demographics. Federal, state, and local governments have all attempted to remedy these issues.

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The first impactful attempt to level the playing field was the enactment of the Fair Housing Act as part of the broader Civil Rights Act during the 1960’s. The Fair Housing Act made it illegal to discriminate against potential home buyers on the basis of race. After the passage of that legislation, minority home ownership rates did begin to rise but, as of today, rates of homeownership amongst black households are the lowest that they have been since before discrimination was rendered illegal. Although Hispanic households are faring slightly better, they are still much less likely to own their own homes than the rest of the country, as a whole. Although there is no singular variable contributing to this disparity, there are a couple of factors that remain constant.

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Income plays an integral role in widening the gap between minority homeownership and the national average. When considering the reasons for the disparity, many people think that the first, and seemingly most insurmountable barrier to entry is coming up with a down payment. Saving money is difficult for many people, especially for those who are straddling the poverty line. For a single parent who makes less than $30,000.00 per year, the idea of scraping together even a third of that for a down payment on a $40,000.00 house can seem just as daunting and realistic as finding the resources to buy a house two or three times that price. 

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The other factor, however, is often easily overlooked. Many people tend to focus so intently on the financial aspect of the homebuying process, that they often forget that the potential borrower must first demonstrate that he or she has a sufficient credit profile to even merit consideration for a loan. Some might still argue that the credit profile is a secondary consideration; if the potential applicants do not have sufficient income to make a down payment, what difference does it make whether they can qualify for a loan that they can’t afford? However, many are unaware of the existence of programs, such as down payment assistance and mortgage payment assistance, that were established to help get people out of public housing and into homes of their own. 

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Despite the existence of these programs, poor credit is still preventing those who would otherwise qualify for this type of assistance from vacating public housing in favor of their own homes. Fortunately, there are now non-profit entities with which lenders and municipalities can pair in order to get those who are often overlooked the assistance that they need. These non-profits utilize a combination of credit coaching and credit education to instill behavioral changes that lead to sound financial decision making. This type of assistance is often invaluable to those occupying the lowest wrung on the financial ladder, and has the potential to make a multigenerational impact. 

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Key Factors Impacting Borrower Credit

In today’s mortgage market it is vital that borrowers understand what impacts their credit profile and ability to obtain financing.  Here are some quick tips for borrowers looking to improve their credit profiles.

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Paying Collection Accounts

Believe it or not, it may be counterproductive to pay off an old debt. Under The Fair Credit Reporting Act, negative defaults such as collections are removed from your report after 7 years. Making a payment on an old debt, say from 5 years ago, re-ages that debt and makes it current. Again, this is noted on your file and has a negative impact on your score, causing it to fall. 

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Before taking a course of action to make payment on an old debt, consult a professional. Re-aging old information can have a huge negative impact on your credit score. 

What’s not on your FICO Score?

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Although a FICO score on your credit report has many considerations that are used to determine your credit worthiness, there are many personal items they ignore. U.S. Law prohibits consideration of the following when determining your credit score.

Marital status, national origin, gender, race, religion, the color of your skin, 

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receipt of public assistance, these have no place in the determination of your credit score. 

While other scores might, FICO does not consider your age as a factor. Similarly, employment history, employer, date employed, title, your salary and occupation are not used. However it is worth noting that lenders may consider this information as part of their scrutiny.


The “DO’s”?

>>Do pay your bills on time.?

>>Do keep credit cards balances low (try to keep balances under 1/3 of your ?current credit limit.?

>>Do pay off debt rather than opening and moving balances between credit cards.?

>>Do apply and open new credit cards (ONLY when NEEDED).????


>>Do NOT max your credit cards.

>>Do NOT miss a credit card payment. 

>>Missing a payment because you forgot not only impacts your credit score negatively, but also can affect your interest rate for that card.

>>Do NOT have your credit report pulled multiple times within a short period.

>>Do check your credit report at least once a year for accuracy and completeness of information.?

These are just a few tips that can help borrowers improve their credit profiles.  For more information or to speak with a credit coach visit www.getcredithealthy.

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New Compliance Trends

The United States has made great strides towards equality in many aspects of life since the civil rights movement of the 1960’s. The housing industry, though, is one area in which we as a country have historically struggled to achieve the desired results. Congress passed two key pieces of legislation aimed at leveling the playing field in the industry. The Fair Housing Act was passed as part of the broader Civil Rights Act in 1968. This law made it illegal for banks to discriminate on the basis of race when evaluating mortgage applicants. Prior to its passage minorities were often unable to obtain loans from most banks, as systematic discrimination was commonplace. 

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Although the Fair Housing Act illegalized overt racial discrimination, it did little to resolve the disparate impact of some other common lending practices. Many banks began to engage in what is known as “redlining” in what they designated as high-risk lending areas.  The practice of redlining is exactly what it sounds like: banks would literally draw a red line around certain areas of states or cities and refuse to lend to people in those areas. Those redlined areas tended to be home to very low to moderate income individuals and families and, more often than not, those neighborhoods were occupied predominantly by minorities. 

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Lending institutions abolished their explicitly discriminatory lending policies, but the racial discrimination that the Fair Housing Act was enacted to prevent was still taking place under the guise of risk-based lending. In response, Congress enacted the Community Reinvestment Act in 1977, which not only made redlining illegal, but compelled banks to lend and invest in those low to moderate income communities and neighborhoods. Although the law was enacted with the greatest of intentions, it has proven to be woefully inefficient in narrowing the housing gap for low to moderate income families, specifically minorities. Furthermore, many lending institutions struggle when trying to internally evaluate performance ahead of regulatory reviews because of the lack of definitive guidelines and frequent implementation of revisions.  

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The CRA Tests

Every FDIC insured bank is responsible for meeting requirements promulgated by the Community Reinvestment Act and is subject to review from regulatory agencies. As discussed above, the goal of the Act is to help low to moderate income Americans and traditionally underserved communities. The definition of “low to moderate income” varies based upon the geographic regions in which institutions operate, as they fluctuate based upon average income for those specific areas. In areas with high costs of living and higher average incomes (such as New York), the poverty line is higher than it would be in areas with lower average income and cost of living (such as Wichita, Kansas).

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The region in which the lending institutions operate is not the only variable that affecs lenders’ scope of responsibility under the CRA. The size of the institution also dictates the stringency of the requirements to which they are subject. The larger the institution (the greater the assets) the more resources it must devote to meeting the three compliance tests. Those tests are: 1) the Lending Test; 2) the Investment Test; and 3) the Service Test. For each test, regulators will give scores of “Outstanding”, “Satisfactory”, “Needs to Improve”, and “Substantial Noncompliance”, and then will give an overall score to denote the institution’s level of general compliance. In this section we will discuss what regulators look at for each test. 

The Lending Test is the most straightforward of the three. When evaluating compliance, regulatory bodies look at the dollar value of loan to deposit ratios for the institutions’ low to moderate income clients. The higher the dollar value of loans to total deposits, the higher the score will be given to the institution being evaluated. One of the most common problems many lending institutions face when it comes to CRA compliance is the lack of definitive guidelines regarding grading thresholds for the three tests. Most lenders are able to develop compliance targets internally based upon past experience, but are always on edge due to the uncertainty about which rubrics regulatory agencies employ when evaluating performance. Although there is no bright-line test, Kenneth H. Thomas, president of Miami-based Community Development Fund Advisors, and former lecturer at the University of Pennsylvania’s Wharton School, has formulated his own thresholds based upon his extensive experience in the industry. He surmised that in order for an entity to achieve a score of “Outstanding” on the lending test, it must have a loan to deposit ratio of at least 80%. 

The second test that lending institutions must pass is the Investment Test. This test looks at the qualified investments that are made in low to moderate income service areas. This test, however, doesn’t simply look at the dollar value of the investments. Although the amount of investment is important when evaluating compliance under this test, regulatory agencies look deeper in order to ensure that the investments are impacting these communities in a meaningful way. Regulators judge the innovativeness and complexity of each investment to encourage investors to thing about novel ways to remedy problems that have traditionally plagued these communities. Lenders are also required to make investments that are responsive to the development needs of these communities. Because adversity faced by beneficiaries of this law vary widely in each geographic area, there cannot be a “one size fits all” method of investing. Regulators want investors to seriously consider the needs of each community in which they invest. Again, although there are no definitive guidelines regarding how much is enough, Thomas suggests that in order to achieve an “Outstanding” rating, lenders should looks to invest 1% of review period assets. 

The last test under which lenders are evaluated is the Service Test. This test looks at the type and number of retail and community development services that banks provide to each low to moderate income service area. Like the Investment Test, this test doesn’t just the number of services into account. Lenders must provide services that are innovative and responsive to the needs of each community in which they are offered. From his experience, Thomas recommends that lenders who wish to attain an Outstanding score must offer 12 services per year per billion dollars in assets.

Despite numerous regulatory bodies and agencies offering overviews and some guidance regarding compliance with CRA requirements, many lenders are still in the dark about what they need to do to receive Outstanding scores because of the lack of definitive compliance standards. Approximately 90 percent of lenders were given an overall grade of satisfactory, while less than 10 percent were able to attain Outstanding marks. These statistics prove that despite devoting significant time and resources to CRA compliance, lenders still struggle with implementing programs that unequivocally meet regulatory standards. 

CRA Compliance Efficacy

When compiling a CRA requirement plan, lenders should seek to implement programs that will not only help the community, but will empower those who the CRA aims to help to become homeowners. For instance, many low to moderate income consumers struggle with credit. There is a demonstrable need for services that provide credit education and remediation in those communities. Many lenders have already begun to partner with non-profit entities that provide these types of services for applicants who do not have the necessary credit scores to qualify for the financial products that they seek. If those same lenders partnered with non-profits to provide those same services at no cost to low to moderate income communities that they serve, it would help them meet the requirements of not one, but two CRA tests. Funding a credit remediation program such as the one described above would obviously sere to help meet the requirements under the Service Test. However, once those low to moderate income households or individuals build their credit profile, they could qualify for mortgages or various other financial products, which would help that same lender meet Lending Test requirements as well. Lenders should begin thinking creatively an order to make strategic to investments to ensure that they are positioned to receive some type of benefit from the resources they are already devoting to community development. 

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Explaining Credit Score Models

This article will provide a brief overview of different credit scoring models, the differences between actual and simulated credit scores, and the importance of knowing your actual consumer credit scores. 

FICO v. Vantage

Your FICO score is a score that is meant to evaluate creditworthiness. It is promulgated by Fair Isaac Corporation and was first utilized by lenders in 1989.  Your FICO score is calculated based upon the following five factors: 1) Payment history, 2) Credit utilization ratio, 3) Length of credit history, 4) New credit accounts, and 5) Credit mix. 

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In 2006, to compete with FICO, the three major credit bureaus developed the Vantage scoring model. This model calculates credit scores using some of the same factors as FICO, but also incorporates some additional information. The Vantage factors include: 1) Payment history, 2) Credit age and mix, 3) Credit utilization, 4) Balances, 5) Recent credit applications, and 6) Available credit. Although Vantage has been making a push in recent years, FICO scores remain the industry standard across various financial sectors for evaluating consumer credit worthiness.  

Actual v. Simulated

It is important to note the difference between actual credit scores and simulated credit scores. There are many websites, such as Credit Karma, that purport to provide consumer credit scores for free. However, consumers should be weary of putting too much credence or relying too heavily on those scores.  A simulated score is calculated based upon actual information in a consumer credit report, but it may not necessarily reflect your true credit score, which is promulgated by the FICO or Vantage models. There are many instances in which consumers review their simulated scores prior to applying for loan or other financial product, only to find out later that they do not qualify because their actual score is lower than the simulated score. 

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Importance of Getting Actual FICO Score

According to FICO, 90 percent of “top” US lenders use FICO scores when evaluating the credit worthiness of applicants. As the predominant scoring model in the US, consumer FICO scores will, more often than not, determine whether a consumer will qualify for the loan or financial product for which he or she is applying. It is imperative that consumers keep this at the forefront of their minds when devising a strategy or making a decision about when and whether they should apply for a mortgage or a car loan. 

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Whenever a consumer applies for financing, and the potential lender makes a hard inquiry (pulls the consumer’s credit), that consumer’s credit score is negatively impacted, and will decrease as a result of that inquiry. If a consumer believes that he or she will qualify based upon the simulated score, but is later denied, their credit score will take a hit unnecessarily. Because of the deleterious effect that hard credit inquiries have on a consumer’s credit profile, it is imperative that consumers know their actual credit score prior to applying for loans. There are companies that offer monthly subscriptions which include actual consumer FICO scores that are updated monthly. This type of service is invaluable for those who are serious about achieving and maintain credit health, and eliminating any guesswork when applying for loans.

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Be A Hero, Outmaneuver, Outperform, Outlast

One of the most common concerns weighing on loan officers across the country is the rising cost of lead acquisition in the face of a steady decline in mortgage applications. An increase in home prices across the market is taking its toll on the number of consumers actively applying for a mortgage. According to reports released by the Mortgage Bankers Association, mortgage applications have fallen a staggering 17 percent from only a year ago, and experts surmise that the rising purchase prices are playing a major role. To compound the problem, refinancing applications have also continued to trend downward, and are the lowest they’ve been since the end of 2000. When you combine these statistics with the ever-increasing cost of origination, it paints a bleak picture for lenders and loan officers. 

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The question has now become, “how can lenders weather these arduous trends to outmaneuver, outperform, and outlast the competition?” Because the number of applications is down, overall, one of the best available solutions is forming of strategic partnerships that will allow lenders to wring all possible value out of those leads that are available by increasing the rate and percentage of conversion. I know this sounds much easier said than done, but if lenders are able to step back to gain some perspective regarding why their leads are failing to transition into successful applications, the problem becomes much easier to solve. 

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Subpar credit scores are one of the leading hindrances to being approved for a mortgage. According to a 2016 study published by the Federal Reserve Bank of New York, more than one-third of Americans have a credit score below 620. Even more alarming, the CFPB published a study in 2015 that found in addition to those with poor credit, there are another 45 million adults who are either un-scoreable or who do not have a credit score. Because the number of applications is down, in general, its is now more important than ever to find creative ways to overcome a low credit score for those applicants who would otherwise qualify for a loan.

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We are beginning to see the emergence of non-profits that specialize in credit remediation and rehabilitation. Those third-party rehabilitation companies provide services to consumers at no cost to the lenders. This allows those lenders to steer their potential clients toward the assistance that they need to qualify without expending any additional resources, rather than the alternative of simply rejecting potential business. Those lenders who are able to stretch their dollar the furthest by making the most of the leads that they do receive, are the ones who will enjoy the most success in this market and live to see the day when it starts trending in a more favorable direction.

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Generate Revenue While Serving The Underserved

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We, as a country, have made huge strides since the civil rights movement of the 1960’s. The U.S. luckily came to the realization that all of its citizens, regardless of race, must have the opportunity to succeed in every facet of life if our country was to succeed as a whole. The disparity in minority homeownership and access to capital for that purpose came to the forefront of the national discussion, which prompted Congress to pass the Fair Housing Act as part of the broader Civil Right Act in 1968. Despite this crucial piece of legislation, it was discovered that banks were engaging in a practice called redlining, which essentially identified low to moderate income neighborhoods and refused to make loans to any residents of the residents therein. This obviously had a disparate impact on minorities who made up the majority of residents in these low to moderate income areas. To combat this practice, the Community Reinvestment Act was signed into law in 1977 which required banks to ensure that all communities that they served were afforded equal access to capital. 

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Despite these regulations, the debate about access to housing for minorities, and the home ownership divide still rages today. Unfortunately, a very large gap still exists between white and minority homeownership despite the concerted effort to remedy the issue. The Urban Institute presented data analyzed by the American Community Survey from the 100 cities with the largest number of black households. Its analysis found that Minneapolis, Minnesota had the largest disparity where the white homeownership rate was 74.8 percent compared to a black homeownership rate of just 24.8 percent; a 50 percent gap. The smallest disparity was observed in Killeen, Texas where the rates of white and black homeownership were 63 percent and 48.5 percent, respectively; a 14.5 percent gap. According to the US Census Bureau, the overall homeownership rate for black households across the country has reached a 50 year low of 41.7 percent. Our country has not seen homeownership rates this low in black communities since before the enactment of the Fair Housing Act, when it was still legal to discriminate on the basis of race. 

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Hispanic homeownership rates, although slightly higher, still pale in comparison to the national average. According to the US Census Bureau, the Hispanic homeownership rate was at 46.2 percent as of 2017, 17.7 percentage points lower than the overall national average of 63.9 percent. Freddy Mac released a report entitled “Will the Hispanic Homeownership Gap Persist” in which it estimates that Hispanics will close the gap with white homeownership rates by 5.1 percentage points by 2035. However, it bases this projection on past immigration patterns which, in this day and age, are far from certain to repeat themselves. 

Many experts believe that the housing bubble and subsequent 2008 recession is the number one contributing factor to the current gap in homeownership. Although the recession impacted all Americans negatively, regardless of demographic, it had a disproportionate impact on minorities who purchased homes at much higher rates during the height of the market. Furthermore, many minority borrowers were steered toward subprime loans despite the availability of other financing options, which resulted in several banks settling for millions of dollars with the Justice Department. 

Although the effects of the recession still affect the vast majority of Americans, they are amplified within minority groups in terms of the lingering damage to their credit. The credit profiles for the majority of those individuals who were able to obtain a mortgage just prior the recession have been scarred by foreclosures and, in many instances, crippling credit card debt incurred in the aftermath to cover necessities. Because these factors can affect credit scores for years, without assistance, the future looks bleak for many of these past borrowers.

Minority credit issues, however, aren’t just limited to those individuals who were directly affected by the housing crisis. The Urban Institute reported that in 2013 only 41 percent of Hispanics and 33 percent of black Americans had credit scores over 720 compared to 64 percent of white borrowers. Minority groups, specifically those who are black or Hispanic, are often plagued by lower credit scores because of the methods by which various scoring models generate credit scores. The CFPB found that minority populations are more likely to be credit invisible because they are less likely to have traditional sources of credit such as loans and credit cards. One solution proposed by Experian in a 2015 white paper entitled “Let there Be Light”, was to incorporate utility bill payments into the credit analysis. The white paper estimated that the inclusion of this data could reduce the number of subprime borrowers by as much as 47 percent. Until alternative metrics are devised to take these extenuating circumstances into account, however, leaders in the housing industry must work to find solutions to bridge the homeownership gap.

Many financial institutions are required by law to provide loans and extend credit to those individuals in low to moderate income communities, but they must do so in a manner consistent with safe and sound operation. Although the spirit of the law is meant to help those populations that are traditionally underserved,  many have argued that it is becoming increasingly difficult to lend in those areas because of the numerous factors discussed above. Many low to moderate income individuals, specifically minorities, do not have the necessary credit profile to qualify for the loans for which they apply. This often puts financial institutions in a bind. Although they are ready and willing to lend to qualified borrowers in those communities, precautions must be taken to safeguard the operation of their business. 

Fortunately for banks and other lenders, there may be a way to not only assist those minority groups and lower income individuals who need it the most, but generate significant revenue by tapping into a market that would have otherwise been inaccessible. The solution is to partner with not for profit companies that provide consumers with credit remediation services in addition to other resources such as coaching and education. When choosing a partner, banks and lenders should ensure that their potential borrowers have access to educational resources which will enable them to understand ramifications of their financial decisions. Doing so will ensure responsible borrowing in the future, which will help consumers and lenders, alike.

It is also imperative that any potential partner have mechanisms in place to track, monitor, and measure progress and results. Doing so will ensure the generation of data that can be studied to evaluate efficiency and the impact on those minority and low to moderate income communities. Those metrics can then be utilized by governmental and regulatory bodies to decide how best to solve the problems faced by those communities going forward. 

If key players in this sector are able to adopt and implement programs to help bridge the housing gap and raise the rates of minority homeownership, the industry as a whole will reap the benefits of a more robust market. There are an estimated 43 million black Americans in the U.S. and Hispanics, who are the fastest growing demographic, make up 18 percent of the population. These two groups represent billions of dollars in potential new loan opportunity. The only logical solution is to get these groups the assistance that they need in order to help eliminate any disparity while simultaneously to strengthening the housing market and our economy as a whole. 

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Keeping Turned Down Borrowers In Your Pipeline

The difficulty of establishing and maintaining a reliable pipeline of new business has become readily apparent across the mortgage industry. Low credit scores, subpar credit profiles, and rising cost of lead generation and acquisition have taken their toll on the price per lead and, consequently, the total cost of origination. Furthermore, the shift from a refinance to a purchase market has only made it more difficult to drum up new business, adding to the frustration experienced by many loan officers in this sector.

In years past, loan officers relied heavily upon in-house generation of leads. Those leads were typically of higher overall quality, and the prior business relationships removed many of the barriers to conversion common to novel sources of business. However, as many in the mortgage industry are now being forced to look outside of their own organizations for new sources of business, they are often stymied by the sheer number of consumers who simply do not qualify for financial products because of their credit profiles.

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According to a report published by the Federal Reserve Bank of New York, more than one-third of all Americans have a FICO score of 620 or below. Furthermore, the Consumer Financial Protection Bureau revealed that over 45 million adults either do not have a credit score or are un-scorable. There are 300 million people in the United States (that number includes children), and 15 percent of them do not have a credit score. All too often, banks simply tell those people who fall outside qualifying parameters that they do not have the necessary credit, and implore them to come back if and when their circumstances change. There are no mechanisms in place to assist these potential clients, and the time and resources spent acquiring and attempting to convert those leads is seemingly wasted.

The question that every lender and loan officer should be asking themselves is: “Is there any way to salvage even a fraction of those rejections by turning them into qualified applicants?” The answer is yes, and the best way to go about doing so is to form strategic partnerships with entities that specialize in credit remediation and rehabilitation. By forming those partnerships, lenders are able to tap into a previously inaccessible market, while broadening the spectrum of customer services that they offer to current and prospective clients and remaining compliant with various federal regulations.

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Some lenders have recognized the need to steer unqualified applicants toward resources that could help them improve their credit, but have reservations about forming these partnerships with third parties. One of the main reasons that loan officers are reluctant to refer a lead to a third party is because they fear relinquishing control over a lead in which they’ve already invested considerable resources. This is why it is imperative to partner only with those organizations that offer a completely transparent rehabilitation process, and which allows the referring lender to maintain its control at every stage of the remediation process.

Ideally, the loan officer should receive assurances from its referral partners that the lead will not sold or referred to any entity other than that which referred the lead. Additionally, lenders should insist upon periodic progress updates when the referral reaches certain milestones. This type of system will allow the lender to decide how interactive it should be throughout the remediation process. Smaller lenders with limited resources may wish to simply monitor progress, while those larger lenders with greater availability of human capital may wish to be very “hands-on” in order to build a stronger rapport with their referrals. Regardless of which tactic lenders decide is best for them, it is imperative that every referring lender receives notification immediately upon the referrals’ completion of the remediation program, so that those lenders can re-capture those leads when they become qualified for the loans for which they initially applied.

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Many lenders are also beginning to toy with the idea providing remediation services, themselves, in an attempt to assuage their own fears associated with referring leads to third party partners. However, many do not realize that if they were to offer these types of services, or even provide advice regarding self-help, they could be reclassified as a “Credit Repair Organization” under federal law. If this were to happen, it could impute unwanted liability. A financial institution that gets reclassified could face fines or other penalties for failing to comply with stringent regulations imposed upon organizations or individuals who provide those types of services or advice. Forming partnerships with reputable companies that routinely provide this type of assistance would ensure that lenders are able to protect and insulate themselves, while still providing a service that many applicants need.

Aside from converting those leads that would have otherwise been unqualified into viable sources of business, strategic partnerships with third party credit remediation companies offer numerous benefits to lenders that are not as obvious. Lenders should be able to outsource the entire credit remediation process without devoting any additional resources, whether pecuniary or otherwise, to those leads that were initially unqualified. Upstanding companies should never charge lenders a fee for their services. When lenders are able to recapture unqualified leads it decreases both, the cost per lead and the average cost of origination, which are two common goals that every lender strives to meet.

Some of the more seasoned lenders may have reservations about working with credit remediation companies or making overarching changes to their business practices and policies. This is understandable, considering that they have enjoyed past success operating as they always have. However, as the industry landscape changes, lenders must adapt in order to maximize the increasingly limited opportunities that present themselves. A strong pipeline to a previously underserved, untapped market will certainly benefit those who have the foresight to access it early to take advantage of the new source of business. Strategic partnerships such as those described herein are one of the best ways to do just that, and will yield a net benefit to lenders, as they do not require the expenditure of precious resources that would be better spent on in other areas of business development. As the marketplace becomes ever more crowded, and the cost of origination continuously narrows profit margins, the adage “adapt or die” has never resonated so clearly.

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Creating Borrowers For Life

Ever since the housing market took a hit back in 2008, the industry has been struggling to bounce back. The imposition of stringent federal regulation, coupled with shifting priorities for younger demographics that have, historically, held home ownership in high regard have taken their toll on lenders’ bottom lines. Lead generation is getting more expensive by the day, while the overall quality of those leads is slowly deteriorating.

The most frustrating aspect of the mortgage landscape, however, is that those leads that could potentially be converted into new business are falling by the wayside because of sub-par credit scores. To those in the lending industry, it’s common knowledge that poor credit is one of the most common hurdles consumers face when it comes to homeownership. The Federal Reserve Bank of New York conducted a study in which it concluded that over one-third of all Americans have a FICO score below 620. One third; that translates into over 90 million people (only takes those over the age of 18 into account). To compound that statistic, the Consumer Financial Protection Bureau estimates that there are another 45 million people who do not even have a credit score. There is little doubt that lenders in today’s market are fighting an uphill battle.

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Loan officers across the country are forced to turn thousands of potential clients away every single day because their credit scores fall just short of the qualifying threshold. When an applicant’s credit score is ten, twenty, or thirty points short of the score required for eligibility, many lenders are tempted to intervene and advise those would-be clients to take remedial steps to raise their scores. The advice could be something as simple as paying off a credit card to lower their debt to credit ratio, or disputing a delinquent account that the prospective client maintains was reported incorrectly. These minor steps might be just enough raise the applicant’s credit score, qualify them for a mortgage on their dream house, and earn the lender a life-long client. However, few lenders realize that providing this type of advice to consumers, no matter how well intentioned, could subject the loan officer and the organization for which he or she works to serious liability from both, the federal government and the consumers to which the assistance was provided.

The Credit Repair Organizations Act (“CROA” or the “Act”) is a federal law, which falls under the broader Consumer Protection Act. Under CROA, any person or entity that provides any advice or assistance to any person with the goal of improving their credit in exchange for valuable consideration (i.e. the sale of financial products) can be classified as “credit repair organization” under the law, even if they’re not being directly compensated for providing that advice. A reclassification of this nature could have a devastating impact on any organization that engages in the practice of providing this or similar assistance. Once a company is classified as a “credit repair organization”, it becomes subject to all of the stringent requirements imposed by the other provisions of the statute, which, if credit repair were not the main focus of that lender’s organization, would almost certainly mean that the lender is conducting its business in violation of the law. The Consumer Financial Protection Bureau has begun to take an interest CROA cases, and has already reached seven-figure settlements with several companies that have run afoul of the statutory provisions.

In addition to potentially being subject to governmental backlash, many lending organizations that provide this type of assistance to their potential clients also risk being stripped of their ability to pull credit. Surprisingly, few people in the industry are aware that many of the largest providers of independent verification services require lenders to certify that they do not engage in credit repair. These prohibitions are often glossed over because many lenders do not realize that the advice they provide actually puts them in breach of these agreements. If these verification services discover that the lenders with which they contract are engaging in these practices in-house, they could very well, and most likely will, terminate the contracts and refuse to provide their services in the future.

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Because of the ever-increasing competition in the mortgage industry, it is imperative for lenders who wish to succeed to undertake initiatives to ensure that they stand head and shoulders above their competition. For the last few years we have seen a shift from a refinance to a purchase market. Additionally, the average origination costs have been steadily increasing, while the quality of leads is on the decline due, in part, to the credit difficulties widely experienced by consumers. Taking all of these factors into account, the question then becomes, “how?” “How can I differentiate myself from my competitors? “How can I increase my conversion rates?” “How can I establish a rapport with my clients to ensure repeat business and brand loyalty?”

One solution is to form strategic partnerships with third party companies that are able fill in gaps by providing services that you cannot. As discussed above, there are thousands of consumers who get turned away every day because of their credit scores. These consumers look great on paper in terms of employment status, income, and other assets, but their FICO scores render them ineligible for loans. Although lenders cannot and should not attempt to rehabilitate these consumers in-house, they should not just turn them away either. Those unqualified or underqualified consumers represent hundreds of millions of dollars in potential market share and, if lenders are able to implement a system to capture even a fraction of those consumers, they could bolster their bottom line by serving what was previously viewed as an untapped market, while establishing customer loyalty by indirectly aiding those customers that have traditionally been brushed off by the competition.

There are several not for profit entities that specialize in credit remediation and rehabilitation no cost to lenders, whatsoever. Although the non-profits were established to benefit consumers, lenders who choose to partner with these companies stand to become ancillary beneficiaries, while providing a niche service to their prospective clients. The effects of implementing this strategy are threefold in that lenders: 1) are able to insulate themselves from the potential liability that accompanies being reclassified as a credit repair organization, while ensuring that these consumers receive the assistance they require; 2) are able to maximize the value of every lead thy receive by providing this service without expending additional time or resources on conversion; and 3) are able to establish brand loyalty by offering a crucial service that competitors do not provide while simultaneously tapping a pipeline of new business.

When evaluating potential partnerships, it is imperative that lenders are able to pinpoint those organizations that are not only reputable, but that employ experienced personnel who are capable of providing the services necessary to rehabilitate the referred consumers. Not only should a chosen not for profit provide credit remediation, it should also provide coaching and education to give consumers who have traditionally experienced credit difficulties the requisite knowledge base to make sound financial decisions in the future. By affording consumers resources that teach responsible borrowing and spending habits, lenders can help ensure that when these clients return to them, ready to refinance or purchase another home in the future, they have the necessary credit profile to allow for an expeditious closing.

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Lenders should also ensure that there are mechanisms in place to monitor the progress of all consumers that they refer to their not for profit partners. This will operate to ensure that not only are the referrals making progress, but that the lenders are advised upon the completion of the rehabilitation process so that they can recapture leads in which they’ve invested considerable time and resources. The lender should also endeavor to periodically follow up with their referrals during the remediation process in order to build stronger relationships, which should lead to higher conversion rates upon completion.

Although it is getting increasingly difficult to close new loans in the mortgage industry, there are plenty of potential sources of business for savvy lenders that know how to recognize them and have systems and strategies in place to capitalize. By differentiating your organization and providing consumers with alternatives to rejection, you have the ability to maximize lead value and cut origination costs, while simultaneously building lifelong client relationships.

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Frustrated With Loan Fallout? Don’t Reject…Redirect.

Quality leads. In the wake of the federal regulations imposed after the 2008 recession, consistent access to quality leads is often regarded as the “X factor” that will make or break a loan officer’s career. Unfortunately, they usually prove to be as costly as they are difficult to come by, and no one method of lead generation has definitively outperformed the rest. Two of the most common lead generation techniques are the purchase of leads from companies that specialize in lead aggregation and direct marketing on search engines such as Google or Bing.

There are many lead generation companies that claim to be more cost effective than others or provide batches of leads at prices that often sound too good to be true. However, more often than not, those cheaper leads are priced so “competitively” because they have already been contacted ad nauseum and are simply not viable sources of potential business. Like most other things in life— you get what you pay for.

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It should also go without saying that a loan officer can’t successfully build his book of business simply by purchasing the most expensive leads available. For instance, a lender might have more success if it markets directly to consumers who are actively seeking out the products being offered by that lender. Depending on the target audience and the nature of the product, lead generation via direct marketing might prove to be more cost-effective and produce better results.

Before investing considerable resources into the various lead generation mechanisms, veteran loan officers apprise themselves of the available generation options and methodologies, their respective costs, and establish procedures and/or partnerships to maximize their return on investment.

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Purchase Leads from Third Parties

One of the more prevalent avenues through which many loan officers and mortgage companies cultivate leads is via third parties that specialize in lead aggregation. These companies have online databases which contain consumer information which may include income, age, current home value, and desired loan amount. Then, depending on the third-party website, lenders have the ability to filter potential customers based upon that information and target only those consumers that meet the lenders’ criteria.

It is common knowledge amongst those who purchase leads from third party lead aggregators that quality is often reflected in the price per lead, and the price per lead can fluctuate widely. The question is, then: What factors influence the quality of any particular lead? First and foremost, the exclusivity of the lead will often be used as the prime indicator of its quality. Exclusivity refers to how recently, and the frequency with which, the lead has been contacted by other lenders. While there is no exact metric for the duration of time elapsed since the last time a lead was contacted, a lead that is sold as exclusive should not have been contacted by another lender for several months and, in some cases, has never been contacted. These leads often provide the best opportunity for a lender to close, which makes them more valuable and, in turn, more expensive than non-exclusive leads.

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Non-exclusive leads, as the name suggests, normally mean that the consumer information has been disseminated to several other lenders who are all vying for that consumer’s business. A lower average closing percentage is reflected in the lower price per lead. Normally the more lenders that receive the lead, the cheaper that lead is.

There are several other characteristics that should also be taken into account when assessing the quality lead. For example, the depth of a lead, or the number of datapoints attributed to each consumer, determine how comprehensive a view the lender will have of prospective clients. The greater the depth, the more informed a decision the lender will be able to make when establishing its marketing strategy. Accuracy of the data is another factor that should be considered by a prospective buyer. The name of a consumer, coupled with incorrect or out of date contact information, is obviously nowhere near as valuable to the lender as those leads for which that information has been verified.

All of the aforementioned characteristics factor into the price of any particular lead or batch of leads. Depending on the source, the actual dollar amount of two seemingly identical leads can vary. One of the highest, if not the highest price per lead was reported by in 2017. Hubspot reported that the average cost per lead in the financial services industry was $272.00. However, this figure has been rebuked by many industry professionals as extremely high and most likely inflated. More conservative estimates place the cost for leads of the highest quality (exclusive, with a plethora of data points, and verified information) anywhere between $70.00 to just over $100.00 per. The price for leads that are semi-exclusive, lack as much depth, and/or lack any of the other important characteristics of the highest quality leads usually decreases proportionately to their information disparity.

Search Engine Marketing

Search engine marketing (SEM) is another method by which many cyber savvy lenders have begun to generate leads. The basic premise of SEM is to advertise directly to those consumers who are searching on Google, Bing, or any other popular search engine, for precisely the products being offered by the lender. For instance, if a lender is looking to target consumers who are in the market for a new home or looking to refinance their current home, that lender can utilize AdWords on Google or BingAds on Bing to ensure that their website and ad copy is displayed at the top of the search results when those consumers’ search terms contain certain keywords chosen by that lender such as “mortgage” or “refinance”. This method of marketing allows the lenders to track certain metrics, such as how many people are clicking on their advertisements and cross-reference the number of clicks with the actual number of applications they receive.

Search engine marketing is a popular tool for those companies who wish to generate fresh leads in-house using their own customized criteria, and who have the human bandwidth to measure and track results. This method, however, can prove to be a double-edged sword. Although the advertiser is only responsible for paying fees in the event that a potential lead clicks their link, if the search parameters are too broad, or the potential lead is looking for something unrelated (such as a college student writing an economics paper about refinancing), all of those excess clicks could prove to be very costly without yielding desired results. A lender using AdWords can expect to pay upwards of $124.00 per lead, which is on the high end of the lead generation spectrum when compared to leads purchased from third party aggregators. In this instance, however, lenders have the opportunity to cut out the middle man and market to consumers, directly. If done right, the lender can target specific consumers with pinpoint accuracy, eliminating wasteful spending. But if done incorrectly, it could prove to be a costly exercise in futility.

Maximize Lead Value

The aforementioned methodologies are meant to serve as two examples of how many lenders choose to generate quality leads and connect with promising prospects. Both have the potential to generate new loan opportunity but, if not properly researched and executed, both have the potential to devolve into expensive albatrosses around the necks of loan officers. Regardless of the outcome, lead generation, although necessary, can, and often will, prove to be a costly endeavor. For this reason, it is imperative to implement strategies to ensure that lenders will wring out all the value they can from the leads they purchase.

In the mortgage industry, a subpar credit score is one of the biggest hurdles to successful conversion of leads. All too often, leads who look great on paper in terms of employment status, income, and other assets, have a disqualifying FICO score. In fact, more than one-third of all Americans have a FICO score of 620 or below. Unfortunately, this means that lenders could wind up shelling out serious cash for leads that would otherwise be considered the highest quality, only to discover that those consumers fall outside their products’ parameters.

Because this problem has become so commonplace, many lenders have begun to partner with organizations that specialize in rehabilitating and recapturing those leads. Why let thousands of dollars’ worth leads, and millions of dollars’ worth of potential business, fall by the wayside because of credit scores? Well, now you don’t have to. Lenders have begun to solve this problem by referring those otherwise qualified consumers to non-profits that specialize in credit remediation and rehabilitation. Although the non-profits were established to benefit consumers, lenders have become an indirect beneficiary. Now they are able to recapture those leads in which they’ve invested so heavily, thus maximizing the return on their investments in the form of millions of dollars in new loan closings.

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Be A Hero, Recapture Your Potential Borrower Leads

It goes without saying that lenders in today’s housing market face a much more burdensome task than their predecessors of just ten years ago. The financial crisis of 2008 forever changed the face of the American economy. The federal government enacted stringent regulations, which were designed to protect and prevent consumers without sufficient means from assuming “overly-burdensome” financial obligations. The recession also prompted many lenders and banks to re-evaluate their own general lending practices and qualification parameters, making it much more difficult for those consumers with less than stellar credit to obtain a mortgage. Implementing those barriers was necessary in some cases. In many others, consumers who would otherwise qualify for a mortgage are denied every day, irrespective of their actual ability to pay back those loans, because credit scores are now weighed so heavily.

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The aforementioned regulations promulgated by regulatory agencies and banks, alike, have made it much more difficult for loan officers to convert their leads into actual mortgages. Rising interest rates have also exacerbated the conversion difficulties by shifting trends from refinancing to much more of a purchase market. Finding a first-time homebuyer, who actually has the necessary credit score to qualify for a mortgage, is becoming more difficult by the day. According to a 2016 study published by the Federal Reserve Bank of New York, more than one-third of Americans have a credit score below 620. Even more alarming is the CFPB’s 2015 study that found in addition to those with poor credit, there are another 45 million adults who are either un-scoreable or who do not even have a credit score.

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The statistics seem to paint a bleak picture for loan officers and lenders, alike. Today, younger groups (such as millennials) who have the necessary credit do not prioritize home ownership, and those who do desire to purchase do not qualify. What if, however, there was a way to convert those unqualified applicants into viable candidates? What if there was a way to tap into a market that was previously inaccessible? Well, the good news is that there is a way. Not-for-profit companies have taken notice of the credit problems facing would-be home owners, and have gone to great lengths to work with those unqualified applicants to rebuild their credit while providing financial education.

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Loan officers across the country have begun to utilize non-profits by referring their unqualified leads for coaching and education. After the applicant completes the necessary courses and programs, lenders are often able to recapture those leads who now qualify for the financial product for which they initially applied. Although the not-for-profits were established for the purposes of helping those seeking to turn their dreams of home ownership into reality, lenders have become an indirect beneficiary of their services via an ever-increasing qualified applicant pool.

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